Finding your first home loan5:25

Household debt has hit record levels, with housing debt growing faster than personal or business debt.Source:Supplied

ALREADY finding it hard to get a mortgage and a foothold on the property ladder?

Well it could become a lot harder if Australia responds to all-time high debt levels like its global counterparts.

The household debt to income figures, released by the Reserve Bank of Australia (RBA), show that our nation’s level of debt compared to our income has risen again, reaching a record level of 186. The ratio is calculated as the value of total debt a household has compared with the total annual household disposable income, that is, after tax.

The higher the ratio, the more net debt we have. In other words, our debt is growing much quicker than our incomes.

Martin North, principal of research and consulting company Digital Finance Analytics, told news.com.au that those levels were at “red alert”.

“If you asked me when I was a lender in a bank years ago — and I know things have changed — I would be worried at about the 130 to 140 level. Essentially what that says there is already some potential stress in the mix there,” he said.

“Obviously banks are now prepared to lend more, and there is Lenders Mortgage Insurance and things that weren’t around in the same capacity, but nevertheless, my view is that once you get above the 140-150 levels, that begins to signal high levels of debt. One-seventy or 180 is a red alert in my mind; that is very high.”

Combined with the fact that housing debt specifically is growing quicker than personal or business debt, this could put pressure on the banking system to tighten the reins when it comes to home loan lending.

Australia has some of the highest household debt in the world, thanks to our obsession with the property market.Source:Supplied

The banking regulator, the Australian Prudential Regulation Authority (APRA), has already tried to do this before.

In December 2014, the surge in mortgage growth, in particular loans for investment properties, prompted APRA to hand the banks a 10 per cent annual growth limit on loans to investors.

The banks then hurried to halt growth by making it harder for homebuyers to apply for investment loans. They increased investment interest rates and they decreased loan-to-valuation ratios (LVRs), or the maximum amount you are allowed to borrow compared to the value of the house. A lower LVR means you have to front up a bigger deposit.

But with RBA figures showing home lending grew by 6.5 per cent in the year ended August 2016, compared to 5.7 per cent growth in business lending and a 1.2 per cent decline in personal lending, Mr North said the regulators need to take it a step further.

Mr North suggests our regulators follow the model implemented in the UK in October 2014. Rather than focusing on LVRs to deter borrowers by way of bigger deposits, this model focuses on debt serviceability and limits lending to lower-income, riskier households.

“Rather than looking at loan-to-valuation ratios, because LVRs actually continue to allow credit to expand when prices are going up … I think debt to income, which is effectively debt servicing levels, is better. The reason that’s important is that ... interest rates will not stay this low forever,” he told news.com.au.

Household debt is growing faster than our incomes.Source:Supplied

“What I would be looking at is what has been done in the UK … The UK is probably the best example because what they’ve said is they want a proportion of loans below a certain debt to income ratio ... It effectively restricts the banks’ ability to be able to make such aggressive loans available to people with relatively modest incomes.”

And what this means for the Australian mortgage market, where banks are competing aggressively for a bigger slice of the lucrative mortgage pie, is that applying for a home loan could become more exclusive.

“There would be some people who would find it harder to get a mortgage, absolutely,” Mr North told news.com.au. “But those with big debts and not a lot of income should be very careful.

“While I understand consumers should have the freedom to do what they want, there are some limits and parameters that should be put on that to protect those individuals but also to protect the broader financial stability of the country.

“Basically, the UK said they are concerned that the level of debt is running ahead of people’s ability to handle it and therefore what they want to do is to put in place mechanisms to begin to manage it now before it gets to a massive problem.”

The household debt figures come just after a survey conducted by Mortgage Choice found that first home buyers are increasingly concerned about not being able to afford their mortgage repayments.